Here are my Takeaways from Flash Boys by Michael Lewis


I think I grasp the story behind Flash Boys: A Wall Street Revolt by Michael Lewis. I say “I think,” because it is not an easy story to grasp. The hero of his story, Brad Katsuyama, put together a very talented team, and spent a long time trying to understand just what was happening to his disappearing stock trades. In other words, it’s a story that is not that easy to discover, or to tell.

flashboysBut Michael Lewis is a master story-teller, and I thoroughly enjoyed reading Flash Boys. As one of our participants said, after my presentation of my synopsis of this book at yesterday’s First Friday Book Synopsis, “this makes me so angry!” I get the anger…

Short version:

With the rise of the number of “stock markets,” (from the traditional dominance of one, to 13 in 2008, to 50 today), the reality is that now stocks are traded in rooms with computers, not with rooms with human traders delivering the orders. And, with the advent of high-speed cables, and the use of high-frequency traders, it is now possible to rig this into an unfair game, with the advantage belonging to those with the fastest connections. And that is what has happened, creating a winner-take-all, if you come in second you’re toast, system. It is an unfair system; a rigged system; an unfair game.

{You might want to also read this earlier blog post prompted by this book: Today is Not Yesterday – (There is no “Stock Market” – There are 50 Stock Markets, and the Number is Rising, says Michael Lewis in Flash Boys}.

Here are a few Definitions to help you grasp the story:

Spread Networks – the “super fast, straight as possible high speed cable from Chicago to New Jersey
. (He returned with a single question: “Can you double the price?”)

Dark Pools — Dark pools were another rogue spawn of the new financial marketplace. Private stock exchanges, run by the big brokers, they were not required to reveal to the public what happened inside them. They reported any trade they executed, but they did so with sufficient delay that it was impossible to know exactly what was happening in the broader market at the moment the trade occurred. Their internal rules were a mystery,

High Frequency Traders –
Super fast; following a “many, many coax-out-the-information teaser-trades” strategy

Thor — A program that sent on order out in delayed increments (so that they would all arrive at the same time at the different exchanges…

Front-running — “Brad knew that he was being front-run—that some other trader was, in effect, noticing his demand for stock on one exchange and buying it on others in anticipation of selling it to him at a higher price.”

Some of the Problems(s)

1. How people buy stock has completely changed – there is no “stock exchange.” (There are 50 exchanges)

  • When he’d arrived in New York, in 2002, 85 percent of all stock market trading happened on the New York Stock Exchange, and some human being processed every order. 

2. The markets are rigged.
3. Financial intermediation is/as a tax…The fifty or so places on which stocks were traded were all designed by financial intermediaries, for financial intermediaries.
4. If the trades do not all arrive to be traded at the same time, then the first to arrive wins with a winner-take-all advantage.

And here are my takeaways:

#1 — Knowing what to value leads to dominance, and success. Not knowing what to value leaves you genuinely “ignorant,” and falling further and further behind.
#2 – Even the people working in this new system did not understand the new system. Therefore, hardly anyone understood/understands this new system.
#3 — The techies have, in one sense, put the old school out of business…
#4 – Incentives really matter — in all behavior, with all decisions
• and, don’t forget the driving force of greed
(• RM — “If I can make more money doing this – whatever the this is – I will”).
#5 – “Second” is no longer survivable. “Faster/Speed” — this is what matters. Smaller and smaller increments of speed dominance can bring ever-richer paydays…
#6 — New from scratch beats old patched up — when it comes to code, and software, and fiber optics, and…
#7 — You’ve got to have some math/computer guys…
#8 – Those who (seek to) game the system have always stayed one step ahead of the regulations/regulators.
(and, #9 – If for no other reason, read this book to think about the issues of problem identification and problem solving).

There are books that help you think about “big-picture issues.” This is such a book. I view this as close to a must-read for this era.

———————-

My synopsis – with my comprehensive multi-page handout, plus the audio of my presentation — is now available on our companion web site, 15minutebusinessbooks.com.15minad

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